John Chiang announces that his office will suspend $3.7 billion in payments owed to Californians starting Feb. 1, because with no budget in place the state lacks sufficient cash to pay its bills.

By Evan Halper and Patrick McGreevy

January 17, 2009

Reporting from Sacramento — The state will suspend tax refunds, welfare checks, student grants and other payments owed to Californians starting Feb. 1, Controller John Chiang announced Friday.

Chiang said he had no choice but to stop making some $3.7 billion in payments in the absence of action by the governor and lawmakers to close the state’s nearly $42-billion budget deficit. More than half of those payments are tax refunds.

The controller said the suspended payments could be rolled into IOUs if California still lacks sufficient cash to pay its bills come March or April.

“It pains me to pull this trigger,” Chiang said at a news conference in his office. “But it is an action that is critically necessary.”

The payments to be frozen include nearly $2 billion in tax refunds; $300 million in cash grants for needy families and the elderly, blind and disabled; and $13 million in grants for college students.

Even if a budget agreement is reached by the end of this month, tax refunds and other payments could remain temporarily frozen. Chiang said a budget deal may not generate cash quickly enough to resume them immediately.

Not all payments will stop Feb. 1. Most school and healthcare programs will be paid, as required by state and federal law. The state will continue to pay more than $6.6 billion in such bills.

And Los Angeles County officials said they would cover welfare payments to more than 500,000 local recipients — for now.

But California is projected to be $346 million short of the funds it needs to pay all its bills in February. By March, the state would be so far in the red that even continuing to suspend payments would not cover the shortfall. California would be insolvent, making the issuance of IOUs likely.

State officials have already designed an IOU template, Chiang said, and have been negotiating with banks over whether taxpayers could cash or deposit them if they are issued. The state could be forced to pay as much as 5% interest on delayed tax refunds if they are not paid by the end of May, Chiang said.

The last time the state issued such IOUs — the only time since the Great Depression — was in 1992.

The suspension of payments is the latest radical move by officials to help keep the state from running out of cash as Gov. Arnold Schwarzenegger and the Legislature battle over how to avoid insolvency.

Schwarzenegger, who hopes to speed up public-works projects to stimulate the economy, wants tax increases, spending cuts and legislation to relax some environmental rules and allow private companies to do some government construction.

Democrats are seeking tax increases as well, but fewer spending cuts. Republican lawmakers would only pare spending and have been blocking any tax hikes.

Meanwhile, Schwarzenegger has ordered that most state workers take two days off per month without pay — equivalent to about a 10% pay cut. The governor also ordered most state offices — including all DMV field offices — to close on those two days. The order is being challenged in court by labor unions.

The state has also halted payments of bond money for more than 5,300 public-works projects.

On Friday, the state Department of Finance temporarily exempted 276 of the projects from the freeze, reasoning that because they are nearly complete, it could cost the state more to shut them down than to finish them.

The exemption, through Feb. 1, will allow the continuation of school construction by the Inglewood Unified School District and the construction of a new Court of Appeal facility in Santa Ana. Work on new rail tracks at L.A.’s Union Station and road projects involving Irwindale Avenue, Martin Luther King Boulevard and Imperial Highway in Los Angeles County will also be able to continue.

Some projects were exempted because the state is under court order to do the jobs. Others would threaten public safety if left uncompleted, according to Mike Genest, Schwarzenegger’s finance director.

“We’re going to take the risk of allowing them to continue a little longer because we are very hopeful will have a budget by Feb. 1,” Genest said.

Contractors lined up at a meeting of state finance officials to warn of the consequences of stopping the bulk of the public-works money. They said shutting down projects already underway would ultimately cost the state significantly. According to Caltrans Director Will Kempton, the state would have to pay $350 million in legal costs, claims for contract breaches and expenses for securing sites that go dormant.

“The bulk of those dollars are lost . . . to the taxpayers,” Kempton said. “You can’t just walk away from a construction project. You have to make sure it is buttoned up.”

It is not just the state that would take a hit. Some school districts relying on state funds do not have the reserves in place to cover the payments they will owe builders if work stops.

Counties are also feeling the pinch. They process the welfare payments scheduled to be halted by the controller’s office Feb. 1. The state is freezing those payments, along with millions of dollars in salaries to county workers who run the programs.

Some county officials say they don’t have reserves in place to cover the state until the budget crisis is resolved.

“We simply don’t have the cash,” said Pat Leary, assistant administrator for Yolo County. “We are in critically bad times.”

About a third of all state welfare payments go to Los Angeles County, where officials said they can shift money around to keep the payments flowing in the short term.

“The million-dollar question is how long this will last,” said L.A. County Chief Executive William T Fujioka. “We cannot sustain a huge and very long hit.”

Yep, Because the Federal Reserve and the Treasury would rather bailout their buddies at CITIGROUP then help the people of California to weather this financial storm.

Ultimately bailing out these financial institutions is just throwing good money after bad. In the end they will fail anyway because of the continuing spiral of foreclosures, credit card defaults, bankruptcies, and commercial real estate collapses..

The real economy(Main Street) is going to bring down Wall Street because Wall Street and President Bush’s Economic policies have brought down Main Street.

“We may congratulate ourselves that this cruel war is nearing its end. It has cost a vast amount of treasure and blood. . . It has indeed been a trying hour for the Republic; but I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. As a result of the war, corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong
its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed. I feel at this moment more anxiety for the safety
of my country than ever before, even in the midst of war.
God grant that my suspicions may prove groundless.”

I must say that I one has to wonder what planet wordgeezer both lives on and is from. In reading through some of the posts I saw no reference to the initial cause of the financial problems…the Community Reinvestment Act passed during the administration of that genius Jimmy Carter. Nor the next cause of the problem…Bill Clinton’s 1995 crackdown on the lenders for not lending sufficiently to those who did not qualify to borrow.

Aapparently the banks and other financial institutions are evil and terrible, etc., for doing what the government forced them to do!

The buck should stop at Congress, and that corrupt institution has utterly failed in its charge to be careful with the taxes which have been seized from the productive class.

with such situations like these, people will be in desperate need for money just to get by–grants and scholarships and every other source of financial help are now doomed in california. the whole world is feeling the financial crisis, and i wish for nothing but the best for everybody affected.

Just another staged attack coming from the elliot. With TRILLIONS of our tax paying dollars being distributed to unknown sources, it’s no wonder we are in a crisis. Does anybody think about what’s going to happen if these needy people don’t recieve the money the survive on. Crime goes up, police won’t be able to handle it. And our government will intervene by sending in U.S. troops which will become MARSHALL LAW. Then we will really become screwed. It happened in New Orleans

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